The exempt vs. non-exempt employee classification is a critical consideration for employers because it allows you to know which compensation and overtime rules apply to them.
Failure to properly adhere to the compensation and overtime standards of the exempt vs. non-exempt guidelines may attract severe penalties to your business. Yikes!
In this aricle, we will cover exempt vs. non-exempt definitions, Canadian and American laws surrounding the topic, and how to properly classify your employees.
The difference between an exempt vs. non-exempt employee boils down to the legal agreement you have with that employee and if they are exempt or non-exempt from the legal requirement of receiving overtime pay. An exempt employee is not eligible for overtime, and a non-exempt employee can receive overtime pay.
Exempt employees are workers who are not entitled to overtime pay. Employers of exempt employees are not legally bound to pay them for extra work hours. The federal standard for work hours in the United States is 40 hours per workweek.
According to the Federal Labor Standard Acts (FLSA), federal law requires that employers in the United States pay employees at least the federal minimum wage. The minimum wage as stated by the United States Department of Labor is $7.25 per hour (Aug, 2022). Bear in mind that some states such as California may have other rates according to their different state laws.
Exempt employees are paid on a salary basis and not per hour. Unlike non-exempt employees, employers may decide whether to pay exempt employees for any extra work outside the official 40 working hours per week. As a business owner, this allows you flexibility in your payment and employee benefits policies.
As an employer, you may implement employee benefits policies to suffice for overtime pay. This may help improve your employee loyalty as it tends to boost their working conditions. Also, if you consistently require any of your employees to work overtime, they may negotiate for possible overtime benefits.
There are certain conditions an employee must fulfill before you can classify them as an exempt employee. Some of these criteria include:
Non-exempt means an employee is not exempted from overtime pay. Employees in this category typically receive hourly wages for their work and are entitled to overtime pay. The overtime pay must be at one-and-a-half times the normal wage rate.
Unlike the United States, Canada doesn't distinguish between exempt and non-exempt employees. This means that you can receive overtime pay in most instances despite how you get paid (salaried vs. hourly) or your job title.
Canada's exemptions to this rule depend on your employment agreement or description of job duties. Below are some groups that are likely to be exempt from overtime pay in Canada:
The "who" of getting exemptions falls under the Employment Standards Act (ESA). Much like the United States, the standard overtime rate for those who qualify is 1.5 times more when Canadians exceed 44 hours per week. The difference being there are fewer situations in Canada where a person might not qualify for overtime pay.
If your job comprises multiple duties that include exempt and non-exempt activities, Canada requires employers to create a clause for the regular rate. These jobs will be defined as having "mixed duties."
For example, if 75% of your duties are handling customers and the rest are managerial, employees can qualify for overtime. However, if the managerial duties make up most of your work, the 50 percent rule applies, meaning you might not receive overtime pay.
Some employees can also establish an averaging agreement, meaning they measure the time that includes two weeks (or more).
In this way, if you work 50 hours one week and 30 hours the next week, you don't qualify for overtime pay because the two-week period doesn't exceed 80 hours.
Employers also have the option to have a paid time off allowance instead. In this way, they receive that time off at a rate of 1.5 times each overtime hour worked.
As a business owner, you must understand how to calculate an exempt vs. non-exempt employee's salary. This will ensure that your employee payment complies with the appropriate legal standards. You can integrate a payroll solution into your business to help you manage and automate your payroll processes.
For a better understanding, let us take for instance an employee who worked for 56 hours in the third week of February 2021.
We assume that the employee's regular pay rate is $20 per hour.
The standard work-week hours are 40 hours per week. So, this employee worked 16 hours overtime for the week (56 - 40).
The salary is:
Regular pay = 40 x $20 = $800
Overtime pay = $20 x 1.5 x 16 = $480
Total pay: Regular Pay + Overtime pay: $800 + $480 = $1280
For exempt employees, only workers who earn below $684 per week may get paid for overtime. The calculation for overtime pay follows the same procedure as already illustrated above.
However, note that different states may have different overtime pay, minimum wage, and working hours rules. Endeavor to find out what applies in your state to minimize the risk of non-compliance. For instance, you can find out how to calculate overtime in California and see how it differs from the federal standards.
There are pros and cons to both. You don't have to pay exempt employees overtime, but you do have to pay them for stat holidays and benefits. For non-exempt, you do have to pay them overtime, and holiday pay - but you have more flexibility in the offerings you provide.
There are usually two sides to a coin. For a better decision, you need to weigh the pros and the cons to determine which option is more profitable.
It is important to note that the overtime pay exemptions provided by the FLSA do not apply to manual labor workers or "blue-collar" jobs. According to the Overtime Fact Sheet by the FLSA, only "white-collar" workers may be exempted from the overlay rules.
Also, the exemptions do not apply to police officers, detectives, inspectors, investigators, firefighters, paramedics, or other workers listed in the Fact Sheet.
To minimize the risk of non-compliance consequences, you may need to engage in professional employee management tools. You will be able to automate some processes and monitor employee activities better for accurate tracking. For managing employees with variable hourly rates - Push is your best friend.
We hope this helped cover all things exempt vs. non-exempt employee - happy managing!
“In the labor numbers, we were reporting about a $300 to $400 difference than what we were getting through Push!”
-Tara Hardie, ZZA Hospitality Group, 16 locations